An Overview – 100% Peak Margin Rule
From September 1, 2021, the Securities and Exchange Board of India’s (SEBI) peak margin regulations’ fourth and final phase will take effect, requiring stock and commodity brokers to receive 100% of the total margin necessary for beginning intraday trades.
Last year, the SEBI enacted peak margin limits with the goal of reducing speculative share sessions and limiting the leverage that brokers can provide their clients. As a result, beginning in December 2020, brokers will switch from utilising the end-of-day position to using the intraday peak position to compute margin requirements.
The rules require the exchange to take photographs of all margins at four different periods during the day, with the greatest margin being the peak margin. To put it another way, if a trader wishes to open a position for Rs 1 lakh and the margin on that transaction is Rs 30,000, the trader will now have to put up 100% of Rs 30,000 in margin with his broker.
Rule applies to both the cash and the F&O segments
Previously, margins were collected in advance and calculated using end-of-day positions. The broker provided clients’ intraday positions as far as the outstanding towards the day’s end was less than what they had already deposited.
The new rules will be introduced in stages, with the first starting in December 2020. Traders have to keep at least 25% of the peak margin between December 2020 and February 2021. Between March and May, this margin was increased to 50%. (second phase). Between June and August, it increased to 75%. (third phase). It will be increased to 100% on September 1st.
Further Key Takeaways
Meanwhile, brokers have expressed their displeasure with the new law, claiming that the higher margin requirements are imposing “unjustified penalties” on traders. An industry association representing brokers, the Association of National Exchanges Members of India, wrote to SEBI earlier this month, noting some of the challenges they encounter.
According to them, the increased margin requirements are causing certain irregularities, such as unjustified penalties being imposed on trading members for failing to meet the requirement.
The new upfront peak margin compels a trading member to collect uncrystallized and unpredictable peak margin from clients ahead of time. In other words, before clients engage in trades, trading members are required to collect upfront money,” the association wrote in its letter to SEBI. The brokers had raised a number of concerns about their ability to meet the margin requirements.
Frequently Asked Questions
What are the new rules for peak margins?
The new upfront peak margin compels a trading member to collect uncrystallised and unpredictable peak margin from clients ahead of time. To put it another way, trading members are required to collect money upfront before clients engage in deals.
What is the formula for calculating the peak margin?
Clearing corporations take photographs of all margins at random points throughout the day to determine the peak margin position intraday, and the highest margin of the four snapshots obtained becomes the peak margin.
What are SEBI’s responsibilities?
SEBI’s primary responsibility is to regulate the Indian capital markets. By enforcing certain laws and regulations, it supervises and controls the stock market and protects the interests of investors.
What is Margin Trading?
Margin trading is a method of purchasing stocks more than what you cannot afford. You are permitted to purchase stocks for a fraction of their true value. This margin is paid in cash or as a security in the form of stock. Your margin trading operations are funded by your broker.